a) A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountants estimate of total costs to be higher or lower than an economists estimate? Explain.
b) Kelly is a clerk and she earns $75,000 per annum. She thinks that her salary is too low, so she resigns and starts her own cake shop by using her savings of $100,000. The savings earn interest at 5% per annum. After one year, she earns an accounting profit of $80,000. What is Kelly’s economic profit? Explain and show your calculation.
c) Based on your answer in (b), is Kelly better off after running her own shop? Briefly explain.